Pandemic economics sickening

The scares over bird flu since 1997 and severe acute respiratory syndrome (SARS) in 2003 have spurred research into the economic costs of pandemics. Studies paint a grim picture of what swine flu could mean for the world economy.

For example, World Bank economists estimated last year that a pandemic with death rates similar to those in the Spanish flu that swept the world in 1918-19 could shrink global GDP by 4.8 per cent.

Although such research can help to identify the economic effects of swine flu, global recession means that some of the mechanisms it describes are already at work. The recession means, perhaps counterintuitively, that the incremental economic effect of a pandemic may be less dramatic than it would be in normal times.

Economists argue that a pandemic would affect both global demand and global supply, but that the first of these is particularly vulnerable to the uncertainty and fear surrounding even the possibility of widespread disease. That would cause consumer spending to fall and businesses to put investment plans on hold.

Asia's experience with SARS is a guide. The outbreak caused a sharp drop in private consumption in the economies it affected. People avoided going out -- as they are doing in Mexico. On Wednesday, the country's president, Felipe Calderon, announced a national suspension of non-essential activities over the next five days.

The canceling of sporting events and concerts, the closing of bars and nightclubs, and people's propensity to stay inside had already cost Mexico City's service and retail industries $55 million a day from April 24, when authorities first closed schools. That sum was expected to double after a ban on restaurants seating customers.

Financial markets have reacted sharply: the peso has fallen by 5.5 percent against the dollar since the emergency began.

Mexico's finance minister, Agustin Carstens, has said that he expects the economic cost to be 0.3 to 0.5 per cent of GDP, based on Asian precedents. Luis Flores, an economist at IXE, a bank, reckons that the government's budget deficit could increase by 0.7 per cent of GDP.

This outbreak has happened when, worldwide, consumer confidence is low. So any further drops in demand because of a swine-flu pandemic may be smaller than those caused by SARS, when airline-passenger arrivals in Hong Kong fell by nearly two-thirds in a month.

But a pandemic would dent hopes of a rapid recovery from recession, by providing yet another reason for gloom to continue.

The uncertainty caused by a pandemic could hit investment, too. Risk premiums for countries affected by the pandemic might rise. And worries about safety, justified or not, pose risks to trade.

Already, China has banned Mexican pork, though there is no evidence to suggest that meat spreads flu viruses. World trade is already plummeting. Widespread reactions of this sort could steepen its dive.

The potential supply-side effects of a pandemic come mainly because people fall ill or die. Infected people cannot work, and others must take time off to care for them. This has an immediate effect on the size of the labor force, but with consequences that last many years.

The future output of those who die is lost. That is especially important when people of working age are taken. The worst economic consequences of AIDS have come from death and sickness among young adults.

The worldwide costs from deaths and hospitalization are hard to calculate in the absence of information about medical costs in each country. However, Martin Meltzer, Nancy Cox and Keiji Fukuda, now deputy director-general of the World Health Organization, did the sums for America in a paper in 1999.

They found that a pandemic affecting 15 to 35 per cent of the population would have cost between $71.3 billion and $166.5 billion (in 1999 dollars).

The bulk of this would come from forgoing all that the sick and the dead would have produced. In other words, it is an estimate of the effect on the potential output of the American economy.

Because of the global slump, many more people are already out of work than in normal times. This probably means that the immediate cost of additional losses in output would be smaller than in the estimates made by Meltzer, Cox and Fukuda.

Several studies have put all this together to estimate the overall impact of a pandemic on economic growth. In 2006 Warwick McKibbin and Alexandra Sidorenko found in a study for the Lowy Institute for International Policy in Sydney that even a mild pandemic could shave 0.8 per cent off world GDP. For the worst possibility they considered, the drop would be a staggering 12.6 per cent.

They reckon a pandemic similar to the one that began in 1918 would reduce growth in the American economy by three percentage points and in Japan by 8.3 points.

Roughly comparable numbers emerge from a study by economists at America's Congressional Budget Office, which found that a Spanish-flu-like pandemic would lower real GDP growth in America by about five points. Even a milder episode would lead to a 1.5-point drop.

These are large declines. The CBO notes that a severe pandemic would be like a typical post-war recession. As it happens, the worries about swine flu come when the world is already in its worst slump since the war. That would dampen the economic effects of a pandemic. But if a pandemic does occur, this would be small comfort indeed.

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